DeepSummary
The episode discusses the role of robo-advisors as passive investors and the dispersion in their returns. The hosts examine robo-advisors like Wealthsimple and Wealthfront, revealing that their portfolios have deviated from purely passive, index fund strategies over time. They also compare the performance of robo-advisors to index funds and active bank mutual funds.
In the 'Would You Rather' segment, the hosts debate whether they would prefer to invest with a robo-advisor or an actively managed bank mutual fund. They weigh factors like user experience, fees, and the potential for closet indexing in bank funds. The discussion also touches on the growth of passive investing versus active management in the financial industry.
In the aftershow, the hosts cover listener feedback, community discussions on topics like leasing versus buying vehicles, updates on new calculators developed by the team, and Ben's self-proclaimed 'addiction' to modeling in Excel. They also briefly mention the Netflix documentary on the Ashley Madison data breach scandal.
Key Episodes Takeaways
- Robo-advisors like Wealthsimple and Wealthfront have deviated from purely passive, index fund strategies over time, making tactical changes to their portfolios in response to market conditions.
- There is significant dispersion in the returns of different robo-advisors, even for portfolios labeled as 'aggressive' or 'balanced,' due to variations in asset allocation and other factors.
- The average investor may not fully understand the investment approach and asset allocation decisions made by their chosen robo-advisor, undermining the premise of passive investing.
- While robo-advisors offer a convenient and user-friendly experience, their tactical portfolio shifts and deviations from passive investing strategies may not always align with sound financial decision-making.
- Actively managed bank mutual funds, while often criticized for high fees, can sometimes outperform robo-advisors and may be an alternative for investors seeking a more hands-off, set-it-and-forget-it approach.
- PWL's investment approach differs from robo-advisors in its commitment to consistency and avoidance of tactical shifts, with only incremental changes over time based on rigorous research.
- The growth of passive investing and the rise of robo-advisors have disrupted the financial industry, but active management still holds a significant share of the market, particularly in Canada.
- Developments in technology and artificial intelligence continue to shape the financial planning landscape, with tools like calculators and modeling software evolving to provide more sophisticated analysis and advice.
Top Episodes Quotes
- “I looked at a couple of different ones, and one of them had the most aggressive portfolio, still had 6% in bonds. So that can drive a lot of that tracking difference.“ by Benjamin Felix
- “I think the average investor is going to understand that either. To your point earlier as this, starting as an index fund portfolio or a cap weighted index fund portfolio, I don't think it's obvious to a lot of people who are signing up with a robo advisor service necessarily what they're getting.“ by Mark McGrath
- “So the questions that you mentioned they should ask are obviously very important. But I feel like the amount of financial literacy it takes to understand that would be such that you wouldn't really want to potentially a robo advisor in the first place, outside of some of those other benefits that you talked about earlier.“ by Mark McGrath
- “So to your point, Cameron, to me, like these new technologies like Wealthsimple, the user experience is really, really slick, but from a behavioral perspective, it makes it super easy to just go online and make a decision. I think that's less true if you don't have that technology at your fingertips.“ by Mark McGrath
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Episode Information
The Rational Reminder Podcast
Benjamin Felix & Cameron Passmore
6/13/24
When robo-advisors first came onto the scene, they were pitched as an easy way to access index funds. These digital platforms provide algorithm-driven financial planning and investment services, with little to no human supervision, and typically use passive investment strategies. But while this technology has revolutionized access, not all robo-advisors are created equal. In today’s episode, Mark, Ben, and Cameron sit down to discuss the role of robo-advisors as passive investors, and the performance disparity in robo-advisor returns, as they investigate different robo-advisors, from Wealthsimple to Wealthfront. Next, in this week’s version of ‘Would you rather?’, we have robo-advisors pairing off against active bank mutual funds, with each of our hosts debating the pros and cons of these two approaches. For our aftershow section, we discuss listener feedback, interesting community discussions, Ben’s addiction to Excel, and much more. Tune in for a deep dive into robo-advisors and how to navigate this technology!
Key Points From This Episode:
(0:04:20) The history of robo-advisors and how they are used today.
(0:08:30) Why there is such a marked dispersion among robo-advisor portfolios; an overview of Wealthsimple’s portfolios and the changes they’ve made over time.
(0:16:00) Wealthsimple's investment returns, fees, and an attribution analysis.
(0:24:19) Why Wealthfront pulled value out of their factor-tilted portfolios in 2022.
(0:26:13) PWL’s investment approach and why no strategy is truly passive.
(0:30:43) What the average investor needs to understand when using a robo-advisor.
(0:32:02) Wealthsimple’s value proposition and why people are drawn to it.
(0:33:33) Our ‘Would You Rather?’ Question: Would you rather put all your money with a robo-advisor or in a big bank actively managed mutual fund?
(0:40:30) The growth of passive investing vs active management in the financial industry.
(0:44:12) AI's impact on financial planning and an update on new calculators we’ve released.
(0:52:38) Aftershow section: listener feedback, community discussions, leasing versus buying vehicles, Ben’s addiction to modelling, and more.
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://x.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://x.com/MarkMcGrathCFP
Wealthsimple — https://www.wealthsimple.com/en-ca
Wealthfront — https://invest.wealthfront.com/
Rational Reminder Episode 308: Dan Bortolotti —
Episode 299: The Most Important Lessons in Investing — https://rationalreminder.ca/podcast/299
The Money Scope Podcast — https://moneyscope.ca/
Episode 251: Covered Calls — https://rationalreminder.ca/podcast/251
Ashleigh Madison: Sex, Lies & Scandal — https://www.netflix.com/za/title/81602884
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Papers From Today’s Episode:
‘Are Banks Better Money Doctors?’ — https://www.researchgate.net/publication/377037694_Are_banks_better_money_doctors_An_analysis_of_mutual_fund_flows_of_bank_and_non-bank_funds_using_Canadian_data